Benefits of pay-as-you-wish pricing

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Trends in pricing

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Pricing Articles Available for Download

The articles from our dissertation are now available as pdf downloads. Get your copy below:

Full Dissertation

Including all four articles. Available as eBook (PDF) for EURO 19.00.

Precision Pricing: Measuring Consumers’ Willingness to Pay Accurately (287 pages)

Preface: A key challenge in pricing management is to set the price right, both for new and exist-ing products. A key approach to this task takes a demand-oriented perspective, which uses the consumer’s demand and his corresponding willingness to pay as a key guidance for pricing decisions. Such a demand-based approach is in line with the concept of customer orientation – a key success factor in marketing. Against this background, the elicitation of consumers’ will-ingness to pay is a task that has gained considerable attention by marketing researchers over the last years. However, many recent academic research studies on this topic have taken a path towards increased complexity and over-specialization that has not always met the required practicability and cost efficiency of management practice. The current highly innovative dissertation by Reto Hofstetter and Klaus Miller has been written in truly cooperative teamwork and has been able to bridge the gap between im-proved academic methods to measure willingness to pay and the pragmatic applicability needs of applied market research. The authors take an intelligent contingency perspective on the elicitation of willingness to pay and can make managerially highly relevant recommendations of when to use which method for the elicitation of willingness to pay. In order to do so, the authors have taken a very broad perspective – comparing different methods across different contexts – and were also able to improve existing methods. I think this dissertation generates original insights and will make an important contri-bution to pricing research. This dissertation is truly world-class and gives an impressive ex-ample of the benefits of teamwork. It was a great pleasure to supervise the authors’ disserta-tion and I wish Reto Hofstetter and Klaus Miller for their future career and also for their pri-vate lives all the very best.Prof. Dr. Harley Krohmer Executive Director of the Institute of Marketing and Management University of Bern, Switzerland The dissertation contains the following four articles: Measuring Consumers’ Willingness to Pay: Do Direct Approaches Really Work? How Should We Measure Consumers’ Willingness to Pay? An Empirical Comparison of State-of-the-Art Approaches Who Should We Ask When Measuring Consumers’ Willingness to Pay For Product Innovations? The Importance of Involvement for the Direct Measurement of Consumers’ Willingness to Pay

Dissertation by Article

Available as eBooks (PDF) for EURO 9.00 each.

Measuring Consumers’ Willingness to Pay: Do Direct Approaches Really Work? (76 pages)
In the present paper we analyze the direct survey approach to elicit hypothetical willingness to pay in a marketing context. Although the direct survey approach has been neglected and is seen as being inferior to indirect approaches by marketing academia, it is widely used in market research practice. Hence, from the standpoint of a marketing researcher, the question arises if the direct survey approaches really work. As a first attempt to answer this question, we conduct an empirical study and analyze the direct survey approach in a marketing context among 2,048 consumers. Statistically, we find evidence for biased results. Economically, we analyze how well the direct survey approach can be used for business decision making such as setting the profit-maximizing price in a monopoly and forecasting the quantity sold as well as profits. We find the direct survey approach to be able to yield good (not statistically different) estimates for profit-maximizing price and quantity, which may explain the use of the methods in applied market research. Based on literature, theory, and the findings of this study, we further present three methods to improve the results of the direct survey approach ex-post. All three methods are able to improve the validity of the business decisions. We conclude that even though the direct approach shows statistically biased results, it is able to guide the marketing manager to good business decisions.
How Should We Measure Consumers’ Willingness to Pay? An Empirical Comparison of State-of-the-Art Approaches (85 pages)
A precise knowledge of consumers’ WTP is instrumental in economic theory and practice. Market researchers can choose among a variety of methods to determine WTP. However, prior literature provides little guidance on the choice of the appropriate approach to valid WTP measurement. In our study among 1,124 consumers, we address this research deficit and assess four state-of-the-art approaches to measure consumers’ WTP with regard to their external validity and economic outcomes. Specifically, we compare the open-ended question format, conjoint analysis, the BDM mechanism, incentive-aligned conjoint-analysis, and real purchase data. Our statistical analysis shows that hypothetical WTP approaches are not always biased. Specifically, our results indicate a significant mean bias for both hypothetical approaches. However, we only find a biased demand curve for hypothetical conjoint analysis, whereas directly stated WTP from an open-ended question format yields unbiased results with regard to estimating consumers’ demand. Moreover, we did not find a bias for the incentive-aligned methods, the BDM mechanism and incentive-aligned conjoint analysis, which indicates a high external validity of these approaches. With regard to our economic analysis, we find that all methods yield valid estimates of optimal price and quantity. However, only incentive-aligned methods are able to give valid forecasts of optimal profits. Our results can guide market researchers to select the appropriate WTP measurement approach for their business decisions.
Who Should We Ask When Measuring Consumers’ Willingness to Pay For Product Innovations? (70 pages)
When eliciting price preferences (WTP) for product innovations, researchers mainly apply hypothetical survey methods. Such hypothetical survey methods, however, are found to yield biased results. In order to reduce this bias, prior research mainly focuses on improving the survey methodology (i.e. the “how” to ask for consumers’ WTP). In the present study, we propose a different approach to reduce the bias in hypothetical WTP measurement. We argue that respondent specific characteristics, motives, and traits (e.g. the “who” to ask) might play an important role when consumers’ WTP is measured for product innovations. Based on literature and an exploratory qualitative pretest study, we develop a conceptual framework of consumers’ characteristics, motives, and traits that might explain the hypothetical bias. Confirmatory factor analysis shows highly significant effects on the hypothetical bias by the two factors consumers’ certainty in the WTP statement and the degree of strategic answering behavior. Based on these findings, we develop a data-cutting approach that is able to remove the bias to an insignificant level. We validate this approach in a second dataset. As the present study shows, respondents’ characteristics, motivs, or traits (the “who”) play an important role when it comes to measuring WTP for product innovations. Market researchers are well advised to take consumers’ certainty in the answer and their strategic answering behavior into account when evaluating such WTP survey data.
The Importance of Involvement for the Direct Measurement of Consumers’ Willingness to Pay (49 pages)
Knowledge of consumers’ willingness to pay is essential for the successful pricing of new and existing products. This study addresses the issue, under what circumstances a direct measurement approach can reveal consumers’ true willingness to pay. Based on a conceptual discussion and an empirical survey, the authors argue that this issue is not related to the choice of alternative direct question formats but rather related to respondents’ involvement: The authors show that the direct measurement approach can provide a valid instrument to measure willingness to pay in the case of highly involved consumers. This finding has important implications for applied market research, since the direct measurement approach can provide a time- and cost-efficient alternative to indirect measurement approaches such as conjoint measurement, if respondents are highly involved in the underlying product.

New article forthcoming in Marketing Review Sankt Gallen

We have a new article forthcoming in a special issue on Pricemanagement of the Marketing Review Sankt Gallen (MRSG). The article deals with the issue how managers can achieve better pricing decisions using valid measurement instruments to gauge consumer’s willingness to pay. As of now the article will only be available in German (German Title: Bessere Preisentscheidungen durch valide Messung der Zahlungsbereitschaft von Konsumenten). The special  issue will be available in print in October 2009. We will then also post a online version for download. Comments are appreciated.

EMAC in Nantes

We had a great time at the EMAC in Nantes! It was interesting to see the conference growing and to meet all the researchers from all over the world. See you all next year in Copenhagen!

Three new conference papers

We will present three new papers on measuring consumers’ willingness to pay accurately at two conferences this summer.

The papers Who Should We Ask When Measuring Consumers’ Willingness to Pay for Product Innovations and The Suitability of WTP Measurement Approaches for Pricing Decision Making will be presented at the Summer Educators’ Conference of the American Marketing Association (AMA) in Chicago and at the European Marketing Academy Conference (EMAC) in Nantes.

In addtion, we will present our paper on Improving the direct estimation of demand by adjusting for incorrect price-statements at the EMAC in May.

We hope to see you there and are looking forward to a fruitful discussion.

Improving the direct estimation of demand by adjusting for incorrect price-statements

We develop a new approach to measure consumers’ willingness to pay (WTP) as a basis for demand estimation that combines the traditional open-ended question format with a price concept selection task and learning tasks for consumers. Based on a conceptual discussion, in an empirical study among 781 consumers, we show that our new approach for measuring consumers’ WTP directly is able to significantly increase the validity of the WTP results.

Who Should We Ask When Measuring Consumers’ Willingness to Pay for Product Innovations

Exact measurement of consumers’ willingness to pay is essential for pricing product innovations. In this case, market researches often rely on hypothetical approaches to gauge consumer demand. These methods are known to be considerably biased. Up to date, there is no convincing approach to eliminate these biases. In this paper, we will address this research deficit and present a simple way to eliminate biases in hypothetical pricing surveys. Our findings guide market researches to identify a specific group of respondents with unique characteristics that enable them to reveal their true price preferences for product innovations. By doing so, we aid market researchers to gain valid forecasts of consumer demand for product innovations.

CBC2WTP Tool is Online

As many readers have requested further information on the calculation of willingness to pay based on conjoint data, we have decided to make our little calculation tool freely available. Check it out here:

Choice Based Conjoint to Willingness to Pay Converter Tool

The tool is free and available as a beta version (v.1.1). Please leave a comment in case of any errors or questions.

Author: Reto Hofstetter

Conjoint measurement in management practice

In the academic literature customer oriented pricing methods such as conjoint measurement have been a hot marketing topic for the last decade. Somehow it is surprising, that Swiss research shows that such methods are still rarely used in management practice. Experiences from  the consulting business support this finding though. The vast majority of firms I’ve dealt with, management might be at best aware of the importance of customer oriented pricing, but doesn’t know the methods of measuring customers willingness to pay. Mostly, prices are determined by costs plus margin, usually considering the price ranges of the relevant competitors.

 

The fact that many firms lack knowledge about customers willingness to pay raises the question of whether firms don’t choose to or don’t know how to consider the customers perspective. Out of my point of view, the answer is clear: in regard of current methods of conjoint measurement, the potential for pricing optimization in Swiss firms, meaning primarily increases of a firm’s profitability, is high. Analysis revealed that in major Swiss firms a price increase of only 1% would boost profits up to 30%. This leverage amazes many marketing managers and executives.

 

In line with the high potentials of the price as a marketing instrument are the risks that go along with it. Price cuts for instance have a direct impact on profits, cause competitors to take counteractions, enhance the threat of price wars, and complicate future price increases. Successful pricing projects therefore require a comprehensive analysis of the pricing situation which demands sophisticated marketing and pricing knowhow.

About the author: Micha Trachsel earned a PhD in marketing at the Institute of Marketing of the University of Bern and is working as a senior consultant at Input, Unternehmens- und Marketingberatung

Calculating Maximum Willingness to Pay (WTP) out of Conjoint Analysis Utilities

Conjoint analysis is a widely used approach to elicit respondents’ preferences. During (e.g. choice-based) conjoint analysis, respondents are asked to choose between several product alternatives. Based on the choices of the respondents, respondents’ utilities for specific product attributes can then be calculated.
When it comes to the price attribute of a certain product, however, market researchers are often not only interested in the utility of a given price level to a consumer, but also in how much a respondent would be willing to pay (WTP) for a specific product in absolute terms.
As WTP is not a direct output of conjoint analysis, it has to be calculated additionally. Following the literature on conjoint analysis, we present a possible approach of how to calculate such WTP data out of conjoint utilities.

The Procedure

Data output of (e.g. choice-based) conjoint analysis comes generally in the form of utility values for specific attribute levels.
How can we use such data to get WTP for a specific product for each respondent? In the literature, the following relationship between utility values has been proposed (see Kohli and Mahajan 1991).

u_product + u_price >= u_threshold + k

u_product: Total utility of the product (excluding utility of price) to the respondent
u_price:Utility of a certain price level
u_threshold: The total utility of a certain threshold (e.g. the no choice option in choice-based conjoint)
k:  Some positive number

In choice-based conjoint, the utility value of the “no choice” option could be used as the threshold u_threshold. u_product represents the total utility for the specific product the market researcher is interested in, excluding utility of price. u_price holds the utility of one of the specific price levels.
The challenge is now to find a price u_price, such that equation (1) holds. Given a large amount of conjoint data, this can best be done using some sort of program that handles that job for (e.g. Java, C or whatever language you prefer). An quick and dirty algorithm that solves the presented problem could look as follows:

1. Read utility data and the definition of the specific product in question
2. Calculate the utility of the specific product for the respondent (u_product)
3. Iterate over all possibe product-price utility relations for the specific product and the respondent and calculate their total utility (total_utility = u_product + u_price)
4. Sort all product-price utility relations calculated in step 3 by their total utility (see Table 1)
5. Seek for the first product-price relation that satisfies equation (1), use k as buffer (k = u_threshold – (u_product + u_price))
   => now you know the lower and upper bound of u_price
6. Use k to (linear) interpolate between the lower and upper bound of u_price to get the correct value of u_price that satisfies (u_product + u_price = u_threshold)
7. Calculate WTP based on the value of u_price
8. Jump to step 2 until all respondents are proceeded.

Example

Consider a respondent with a utility of the none option (u_threshold in our case) of 4.158. Sample data that might result after step 4 is shown in table 1.

<Table 1>
Possible output after step 4 (using 13 price levels):Product utilities for product a1=1, a2=1, a3=2, a4=1 for respondent 38; u_threshold: 4.158

u_product=1.58, u_price= 6.82, u_total=8.41 u_product=1.58, u_price= 5.83, u_total=7.41 u_product=1.58, u_price= 4.15, u_total=5.73 u_product=1.58, u_price= 3.01, u_total=4.59 u_product=1.58, u_price= 2.08, u_total=3.66 u_product=1.58, u_price= 0.46, u_total=2.04 u_product=1.58, u_price= 0.02, u_total=1.60 u_product=1.58, u_price= -0.56, u_total=1.02 u_product=1.58, u_price= -0.96, u_total=0.62 u_product=1.58, u_price= -1.37, u_total=0.21 u_product=1.58, u_price= -4.67, u_total=-3.08 u_product=1.58, u_price= -6.26, u_total=-4.68 u_product=1.58, u_price= -8.53, u_total=-6.95

u_price that satisfies equation (1): 3.16; resulting WTP for respondent 38, 4.82 (USD)

Given an u_threshold of 4.158 we find that u_price has to be between 2.08 and 3.01. After linear interpolation we find an u_price that satisfies equation (1) as 3.16. It is then straightforward to calculate the maximum WTP, which is in our example 4.82 USD.

How do you calculate WTP out of conjoint analysis data? Any comments are highly appreciated!
PS. We have implemented the algorithm using Java. Please contact us if you are interested in the detailed code.

Author: Reto Hofstetter

Literature

Kohli, Rajeev, and Mahajan, Vijay (1991), A Reservation-Price Model for Optimal Pricing of Multiattribute Products in Conjoint Analysis, Journal of Marketing Research, 28 (August), S. 347-354.